German economists fear complacent coalition risks national decline

German government attacked for doing nothing to stop the slow erosion of
dynamism and for insisting rigidly on further austerity for Europe

The coalition deal, thrashed out over two months of talks and endorsed by Social Democrats over the weekend, pulls Germany to the LeftPhoto: Reuters

9:38PM GMT 16 Dec 2013

Germany's Grand Coalition under Chancellor Angela Merkel takes the helm on Tuesday under a blizzard of criticism from economists of all stripes, attacked for doing nothing to stop the slow erosion of German dynamism and for insisting rigidly on further austerity for Europe.

“It is a lost chance for Germany’s future: the deal puts extra strain on business and makes Germany a less attractive place for industry,” says Ulrich Grillo from Germany’s industry lobby (BDI).

The coalition deal, thrashed out over two months of talks and endorsed by Social Democrats over the weekend, pulls Germany to the Left, rolling back Hartz IV reforms credited with transforming Germany from “Sick Man” to economic paragon over the past decade.

Business is up in arms over a minimum wage of €8.50 (£7.17) an hour and a clampdown on temporary workers. The German “tax wedge” – or tax share of labour costs – will approach 50pc, the third highest in the OECD bloc. “We’re seeing a gradual reversal of the reforms that made Germany competitive,” said Christian Schulz, from Berenberg Bank. “This won’t be noticeable as long as Germany is in an upswing. It will hit in the next downturn.”

Germany has outperformed EMU peers in recent years, partly due to a 20pc cost edge over Southern Europe caused by exchange rate distortions. It is also due to a boom supplying heavy goods for China’s industrial leap forward, a phase that may not last as China shifts gears.

Jens Weidmann, the Bundesbank’s chief, said the good years had masked underlying slippage, warning that Germany could become the sick man again if it was careless. “An economic headstart can quickly be lost,” he said. Investment has been falling and productivity has grown at just 0.6pc a year for a decade, half the OECD rate.

The BDI said the coalition deal failed to halt the surging cost of power under the country’s Energiewende or switch to renewables. German firms pay twice as much for electricity as US rivals, and 30pc more than the EU average. “The international competitiveness of German industry is in danger,” said the BDI.

The deal will trim subsidies to solar and wind power to contain costs spiralling towards €1 trillion (£840bn) over 25 years, but at the same time it sets a renewable target of 55pc to 60pc of total energy by 2035. This is much harder to achieve after Mrs Merkel’s decision to wind down Germany’s nuclear industry following Japan’s Fukushima disaster. The coalition ruled out any move on shale fracking. Utilities will have to rely on coal to plug gaps, playing havoc with Germany’s greenhouse gas targets.

Cologne’s Institute for Economic Research said the accord did little to prepare Germany for an ageing crunch, and watered down earlier plans to raise the retirement age to 67. Germany is already Europe’s oldest society, with a median age of 45. Its workforce will shrink by 200,000 a year this decade. This will push up the old age dependency ratio from 31pc in 2010 to 36pc in 2020, 41pc in 2025 and 48pc in 2030.

The deal offers no breakthrough on Europe, insisting on a “strict, sustained continuation” of EMU budget cuts. “The principle that each member state is liable for its own obligations must be upheld,” it said, vetoing any form of debt pooling.

“The agreement does not contain anything that would solve the European debt crisis, re-ignite growth in the euro periphery, or dampen the disastrous impact of austerity,” said Sebastian Dullien from the European Council on Foreign Relations in Berlin.

Prof Dullien said it had blocked a viable EU banking union and left in place the “toxic vicious cycle” between weak banks and weak sovereign states, each at risk of pulling the other down.

The deal raises public investment by almost €6bn a year for four years and will boost consumption through higher pension payments. This may narrow the eurozone’s North-South gap slightly and reduce Germany’s current account surplus to just under 6pc of GDP, the level where it could face sanctions. “The German surplus will remain dangerously large,” Prof Dullien said.

“The message from Berlin to its euro partners is: the euro crisis is just not our priority. The economic problems you are experiencing are not our problems and we will not move until it becomes absolutely necessary.”